The pandemic is having an impact on commodity prices just as calves are coming off of pasture. What are your options? It depends.
Last Wednesday, March 11, the NBA postponed and/or cancelled games for the rest of the season. During the broadcast that included the NBA’s cancellation, I got a notification on my phone that Tom and Rita Hanks had been diagnosed. The pandemic became more present overnight for millions of Americans, including the agriculture community. The same day HLSR announced it would be cancelling all further events. The Star of Texas Fair and Rodeo in Austin followed suit shortly thereafter.
The cow herd reached its peak in 2019, and the number of cattle on feed broke monthly records several times. As a result, beef production is up 5.5% this quarter compared to a year ago. Feeder and Fat prices were already depressed due to typical seasonal patterns. These coalescing pushed price for calves of most weights to some of the lowest prices since the drought liquidations in the early 20-teens droughts.
The CME April ’20 Feeder contract opened gap-down on March 12. The contract eventually fell to a low of $108.2/cwt on March 16. Deferred contracts fell in a similar fashion. All of this after reaching a January 10 high of $149.95/cwt. Cash price followed suit, while not to the same magnitude. The Tulia-Dalhart-Amarillo average for 6-7 cwt calves fell from $128/cwt the week of March 12 to $117/cwt the following week. All of these price moves lead many producers to ask, “What now?”.
Most of us are in the process of pulling calves off of wheat, or very close to making that determination. The sudden change in prices may now complicate that decision. Should you try out retained ownership through the yard? Should you leave the calves on pasture through late April or May instead of removing them now? It depends.
Evaluating the Decision for Yourself
Dr. David Anderson, Livestock and Food Products Marketing Economist, Pancho Abello, District 4 Management Economist, and myself put together an analysis of options to answer those questions. You can analyze the retained ownership decision for yourself using spreadsheet D4 at the Extension Agricultural Economics Beef Cattle Decision Aids page. You can also evaluate the decision of ‘gain or grain’ for your calves on wheat at AgriLife’s Amarillo Research and Extension Center page using the 2020 Wheat Harvest Analyzer.
No matter the choice made, there are risks. Will prices continue to fall or will they recover? Will the impacts of the pandemic and its severity continue to grow? If you leave calves on pasture you are increasing production risk. Will a weather event throw unexpected challenges at us? Are futures and/or options tools to be considered?
Sell Now
The first option is to stick with the standard plan and sell calves now, or in the very near future. For our analysis, we assumed a grazing contract of $0.55/lb. gained, a purchase price and weight of $155/cwt and 475 lb., respectively, and a sale price of $125/cwt. Average daily gain (ADG) on wheat for our scenario was 1.3 lb./day yielding a sale weight of 691 lbs.
Table 1 shows the results of selling now. Potential outcomes with different purchase and sale prices are in Table 2. Expected returns above variable costs under expected prices and costs are -$69/head.
Table 1. Assumptions and Results of Selling Now
Table 2. Sensitivity Analysis of Selling Now
Wait
You also have the option to leave calves on pasture and sell at a heavier weight later in the year. We maintain the purchase and production assumptions of the previous option, but the sale assumptions change. Rather than selling mid-March, sale in early May means that calf weight is closer to 800 lbs., and a sale price of $115/cwt. The risk of choosing to wait is the potential for a continued drop in price, while the upside is the potential for the impacts of the pandemic to dampen and price to potentially increase.
Table 3 shows the results of selling now. Potential outcomes with different purchase and sale prices are in Table 4. Expected returns above variable costs under expected prices and costs are -$106/head.
Table 3. Assumptions and Results of Selling in May
Table 4. Sensitivity Analysis of Selling in May
Retained Ownership
The final option is to retain ownership through feeding. Retaining ownership comes with its own profile of risks and potential rewards. More time means more opportunity for an unforeseen weather or disease related challenge. You also bear more of the price risk. Retaining ownership through feeding opens you to the risk of fluctuations in grain price as well as the risk in the cattle market. However, you tend to pick up more of the total production dollar of that animal the longer you and add value to it.
We’ve assumed the same calves that were on pasture in the first two scenarios move directly on to feed. However, in this scenario instead of selling to the feeder, you sell to yourself and retain ownership through the yard. We make several assumptions. First, Cost of Gain (COG) in the yard is $0.72/lb. COG includes grain, veterinary care, marketing cost, and the yardage fee paid to the yard manager for caring for your calves (about $0.40/head/day). The assumed purchase price of the different weights changes slightly; 7 cwt calves purchased from grazing operation at $125/cwt and 8 cwt calves purchased from grazing operation at $115/cwt. We also assume that 700 lb. calves are on feed 210 days while the heavier (800 lb.) calves entering the yard in May are on feed about 180 days. This means they will all be sold under about the same price, about $100/cwt
Table 5 and Table 6 show a range of potential outcomes under different prices and COG for retained ownership of calves entering the yard in mid-March vs. early May. Expected returns for retained ownership through the feedyard beginning mid-March are approximately -$9/head while retained ownership through the feedyard beginning in early May are approximately $12/head.
Table 5. Sensitivity Analysis of Retained Ownership through Feedyard Beginning in March
Table 6. Sensitivity Analysis of Retained Ownership through Feedyard Beginning in May
So, What Now?
Under our assumptions, and the prices last week, continuing to graze through May and then retaining ownership through the yard yielded the highest expected returns. However it is critically important for you to evaluate this decision for yourself.
Since these analyses were developed, the April Feeder price rallied somewhat from its low to $118/cwt. You might have different assumptions than our analyses assumed. The wheat pasture you have might not sustain your calves through May and factoring in hay purchase will certainly increase your breakeven price. Any decision will also differ if you were hedged prior to the price drop. Therefore, it is important to evaluate this decision based on your current data. You can analyze the retained ownership decision for yourself using spreadsheet D4 at the Extension Agricultural Economics Beef Cattle Decision Aids page. Evaluate the decision of ‘gain or grain’ for your calves on wheat at AgriLife’s Amarillo Research and Extension Center page using the 2020 Wheat Harvest Analyzer.
Contact me at benavidezjustin@tamu.edu, Dr. David Anderson, or Pancho Abello with questions or for help with any of these tools.